The EU ETS carbon market currently has a surplus of 2 billion allowances, which has contributed to the low carbon price of around €6 per tonne, down from more than €30 per tonne in 2008.
The Department of Energy and Climate Change (Decc) has called for the cancellation of the surplus allowances before 2020 to “help restore the balance between supply and demand” and increase the carbon price, which in turn would encourage investment in low carbon technology.
Decc stated it is also considering the potential of the suggested Market Stability Reserve, a mechanism proposed by the European Commission in January which would withhold allowances from being auctioned when there is a high surplus in the market and re-inject them when the surplus is lower.
The UK added that it wants to free allocation of allowances to be revised “to protect those who need support most to adjust over the long term”.
A reduction in red tape is also urged, such as the scaling back the compliance costs and administrative burdens by “ensuring that small sources of emissions are treated proportionally”.
Energy secretary Ed Davey said: “The UK is asking for bold and comprehensive reforms to restore the ability of the EU ETS to drive cost-effective emission reduction and low carbon investment.
“A glut of emission allowances of the carbon market has thrown the system off course.
“This is delaying the low-carbon investment that countries need now to meet long term targets, thwarting the economic growth that these investments will bring.”